Coke and Pepsi proxy clash with activist investor over sugar hints at future skirmishes

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Harrington Investments is locked in a battle with PepsiCo and Coca-Cola that may require the soda giants to be extra clear concerning the influence their sugary drinks have on public well being. Now, it simply must hope that sufficient of its fellow shareholders agree.
The small California funding agency is asking shareholders to vote on a measure requiring PepsiCo and Coca-Cola to offer the data by means of an impartial report, with a deal with drinks marketed to youngsters and younger customers. 

“We’ve got to place continued strain and chip away at them and present that we’re not going away. This problem is not going away,” stated Brianna Harrington, a analysis analyst and shareholder advocacy coordinator at Harrington Investments. “It is solely going to develop into increasingly related. It is solely going to develop into extra critical.” 
The continued battle with PepsiCo and Coca-Cola may provide a glimpse into future skirmishes down the highway the place shareholders search extra affect in company America on points overlaying every part from politics and variety to well being and the setting. 
Up to now, investor success has been largely relegated to matters reminiscent of board make-up or government compensation. However there are indicators environmental and social points are garnering extra consideration throughout the annual proxy season — and gaining momentum that might at some point result in extra of them successful a majority of shareholder assist.  

Courtesy of Topo Chico
 

Harrington Investments, which focuses on socially accountable investing and shareholder rights, first launched the sugar and public well being proposal in Coca-Cola’s annual proxy in 2019. Emboldened by what it seen as its success there, it launched the same decision a 12 months later at PepsiCo and McDonald’s. In 2020, 7% of Coca-Cola’s shareholders voted in favor of the measure, up from 4.9% in 2019. The decision at PepsiCo obtained the backing of 11% of shareholders in 2020. 
“Growing the voting threshold — that’s vital simply to indicate that there’s rising assist for this problem and shareholders have gotten more and more extra involved concerning the problem, particularly with the pandemic,” she stated. 
Howard Berkenblit, a company and securities lawyer who oversees the capital-markets group at Sullivan & Worcester, stated it isn’t unusual for lots of a majority of these shareholder proposals to get low assist.
“That is why corporations need to improve the thresholds [for a resolution] as a result of it turns into … an annoyance and a trouble for the corporate that it has to place this of their proxy assertion yearly and to must tally up the votes and clarify themselves,” he stated.
Soda and different sugary drinks and snacks are underneath hearth as elevated consumption of the sweetener has develop into related to the next threat of circumstances reminiscent of weight problems, coronary heart illness, diabetes and most cancers. These and different illnesses even have been tied to a higher probability of creating critical issues from COVID-19.
Harrington Investments has a small place in every beverage maker, proudly owning 50 shares of PepsiCo and 100 shares of Coca-Cola, in line with every firm’s proxy. The inventory was valued at $7,200 and $5,350, respectively, primarily based on Friday’s worth on the shut of buying and selling. The agency acknowledges it is going through an uphill climb convincing in any other case reluctant corporations to maneuver ahead.
“The businesses is probably not keen to take motion, however we predict it is vital for shareholders to have the chance to vote on this,” she stated. “Shareholder strain is vital.”
Her agency talked with the authorized council from PepsiCo in January, however the New York-based firm wasn’t “very desperate to undertake this,” Harrington stated. “They simply wished to debate, basically, the great issues they’d completed and reiterate that it’s pointless for them to do such a report.” The advisory agency hasn’t had any dialogue with Coca-Cola on the decision this 12 months.
‘A trouble for the corporate’
PepsiCo and Coca-Cola each advisable shareholders vote in opposition to Harrington’s decision of their proxy. House owners of Coca-Cola’s inventory are anticipated to vote on the measure throughout its digital shareholders assembly on April 20, whereas PepsiCo’s might be up for a vote throughout its assembly on Could 5.
Spokespersons with PepsiCo and Coca-Cola each declined to remark past the positions outlined by the businesses of their current shareholder proxies.
In its submitting, PepsiCo’s board of administrators stated it stays “dedicated to responsibly advertising and marketing our meals and drinks, significantly to youngsters.”

Barry Brecheisen through Getty Photos
 

PepsiCo added it “has set a strong and significant aim” for at the least two-thirds of its international beverage portfolio to have 100 or fewer energy coming from added sugar per 12-ounce serving by 2025. The snack and beverage maker stated it’s working towards this aim by reformulating its drinks to scale back added sugar, providing low and no sugar merchandise in addition to smaller portion sizes, and introducing new choices that lack or have much less of the sweetener.
“By our added sugar discount effort, we consider we aren’t solely addressing the considerations raised on this proposal but additionally are creating new alternatives for aggressive benefit and future market development,” PepsiCo stated.
Coca-Cola’s board of administrators stated in its proxy {that a} report on sugar and public well being already exists and an extra doc “wouldn’t present added worth or data for our stakeholders.” The board added the proposal suggests Coca-Cola isn’t taking steps to assist individuals average sugar consumption, a press release the corporate disagreed with.
The maker of Weight loss program Coke, Sprite and Fanta famous it has accelerated the growth of its beverage portfolio away from sugar into merchandise like tea, dairy, water and low. The Atlanta firm additionally has taken steps to scale back added sugar in its present merchandise. Coca-Cola lower the quantity of the sweetener in practically 1,000 drinks, together with 600 collectively in 2018 and 2019, the corporate stated. In 2019 alone, it claimed to have eliminated 350,000 tons of sugar on an annualized foundation.

“The businesses is probably not keen to take motion, however we predict it is vital for shareholders to have the chance to vote on this. Shareholder strain is vital.”

Brianna Harrington
Analysis analyst and shareholder advocacy coordinator, Harrington Investments

It is not arduous to see why corporations usually object to shareholder proposals. Along with the undesirable publicity, they are often expensive and time-consuming for corporations to overview as they require involvement by senior executives, the board of administrators and legal professionals.
Rick Hansen, beforehand the company secretary and assistant basic counsel at Basic Motors, stated in a letter to the Securities and Change Fee final 12 months that the auto large spends about 75 hours on every shareholder proposal it receives. Whereas GM stated it would not try and assign a greenback worth to every one, it agreed with commenters to the SEC prior to now who estimated a price of between $87,000 to $150,000.
Shareholder assist on the upswing
There may be rising proof that momentum for so-called ESG resolutions — environmental, social and governance — are gaining assist amongst shareholders who count on the businesses they spend money on to take a stand on the identical points which might be vital to them as traders and customers. 
The variety of shareholder proposals that went to a vote rose from 426 in 2019 to 434 in 2020 — the primary improve in 5 years, in line with information offered by Glass Lewis, a proxy advisory agency. The corporate famous whereas common investor assist for shareholder resolutions declined to 31.7% in 2020 from 32.9% a 12 months earlier, there was “a big year-over-year improve” within the proportion of majority-supported environmental and social shareholder proposals. 
“It seems that the bottom is shifting with respect to how traders are viewing shareholder proposals, and ESG-related points, extra broadly,” Glass Lewis wrote in a report reviewing the 2020 proxy season. “These proposals will proceed to play an more and more essential position in traders’ engagement with corporations on vital environmental, social, and governance points.”
Meg Jones-Monteiro, program director of well being fairness on the Interfaith Middle on Company Duty, stated customers’ curiosity in being wholesome and watching what they eat and drink has put strain on corporations to reply by means of their product combine — a shift that’s being intently watched by traders who may lose cash if their shares decline as gross sales fall or development slows. This has naturally opened the door to corporations to be extra participating on environmental and social points, she stated.
“The hope is that if [consumer and investor pressure] converge, then you definately’re capable of push corporations in the correct path,” stated Jones-Monteiro, whose coalition represents greater than 300 international institutional traders. “The businesses are additionally conscious of this. They’re recognizing that there’s shopper demand, in order that they must make a few of these modifications.”

Dimitrios Kambouris through Getty Photos
 

Shareholders may quickly discover it more durable to submit resolutions for a vote at annual conferences. The U.S. Securities and Change Fee narrowly handed a rule final September that may require shareholders to carry $25,000 of inventory for at the least one 12 months, up from $2,000 at present, so as to submit such proposals. For longer-term traders, that degree will fall to $15,000 after at the least two years and $2,000 after three years. The rule is predicted to enter impact subsequent proxy season. 
The SEC is also growing the edge every proposal should gather to ensure that it to be resubmitted for a vote to five% the primary 12 months, 15% the second and 25% the third. Presently, the extent for resubmission is 3%, 6% and 10%.
Berkenblit stated whereas momentum is constructing, particularly for environmental and social points in annual proxies, proposals reminiscent of these coping with “sugary drinks … are nonetheless decrease on the radar of activist traders; they don’t seem to be half of a bigger motion.”
He was uncertain Harrington would garner a “vital quantity” of votes until it spends extra money or mounts an aggressive marketing campaign. The extra doubtless situation, Berkenblit predicted, was the resolutions would gather the backing of 10% to fifteen% of shareholders.
Firms in lots of circumstances are reluctant to permit shareholder proposals, particularly in the case of a difficulty or an trade they consider they perceive higher than an out of doors shareholder, Berkenblit stated. 
“Firms need to handle their very own affairs, and in case you do not like the best way they’re doing issues, vote in opposition to the board or vote together with your ft and promote the inventory,” he stated, noting a stance taken by many corporations.
When a shareholder requests including a decision to an annual assembly, corporations have just a few choices. They’ll embrace it within the proxy — the trail of least resistance — or attain a compromise with the shareholder to get the proposal withdrawn. In circumstances the place these do not happen, corporations can apply for an exclusion from the SEC, or search for procedural hurdles to cease it, reminiscent of if the particular person hasn’t held the shares for lengthy sufficient or did not get the proposal in on time to be included.
Whereas many proposals by no means get accepted, even ones that do not succeed can function a place to begin to construct momentum for future motion, both by means of different resolutions or motion by the corporate itself. Harrington stated her agency is hopeful it can obtain sufficient assist to remain on Coca-Cola and PepsiCo’s proxies for an additional 12 months, however that it might “attempt a unique method” it has but to outline it if falls quick.
“It could be a victory for us to proceed to press the difficulty,” she stated, noting the sugar and public well being decision is much more related than when Harrington Investments first proposed it in 2019. “Except they obtain this type of strain, they don’t seem to be going to in all probability need to make a considerable change or simply do something that we’re asking them within the decision.”

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